QuickLogic Corporation
QUICKLOGIC CORPORATION (Form: 10-Q, Received: 11/03/2015 16:42:52)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 FORM 10-Q  
  (Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 2015
OR
 
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From               To              
COMMISSION FILE NUMBER: 000-22671
 
 
 
 
 
 
QUICKLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
DELAWARE
 
77-0188504
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1277 ORLEANS DRIVE SUNNYVALE, CA 94089
(Address of principal executive offices, including Zip Code)
(408) 990-4000
(Registrant's telephone number, including area code)
 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes  [x]    No   [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   [x ]     No   [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
[ ]
 
Accelerated Filer
 
[x]
 
 
 
 
 
 
 
Non-accelerated filer
 
[ ] (Do not check if a smaller reporting company)
 
Smaller Reporting Company
 
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).     Yes  [ ]    No  [x]
As of October 29, 2015 , the registrant had outstanding 56,599,892 shares of common stock, par value $0.001.
 
 


Table of Contents

QUICKLOGIC CORPORATION
FORM 10-Q
September 27, 2015
 

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amount)
 
 
September 27,
2015
 
December 28,
2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
23,441

 
$
30,050

     Accounts receivable, net of allowances for doubtful accounts of $0 in both periods
1,633

 
1,552

Inventories
2,372

 
4,952

Other current assets
833

 
1,146

Total current assets
28,279

 
37,700

Property and equipment, net
2,563

 
3,217

Other assets
231

 
222

TOTAL ASSETS
$
31,073

 
$
41,139

 
 

 
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
3,020

 
$
2,506

Accrued liabilities
2,029

 
1,574

Deferred revenue
82

 

Current portion of capital lease obligations
229

 
225

Total current liabilities
5,360

 
4,305

Long-term liabilities:
 

 
 

Revolving line of credit
1,000

 
1,000

Capital lease obligations, less current portion
120

 
191

Other long-term liabilities
127

 
76

Total liabilities
6,607

 
5,572

Commitments and contingencies (see Note 13)


 


Stockholders' equity:
 

 
 
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.001 par value; 100,000 shares authorized; 56,600 and 56,182 shares issued and outstanding, respectively
57

 
56

Additional paid-in capital
240,319

 
238,419

Accumulated deficit
(215,910
)
 
(202,908
)
Total stockholders' equity
24,466

 
35,567

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
31,073

 
$
41,139

 
See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

3

Table of Contents

QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27, 2015
 
September 28, 2014
Revenue
$
4,194

 
$
4,124

 
$
15,326

 
$
22,124

Cost of revenue
2,952

 
2,361

 
9,062

 
13,287

Gross profit
1,242

 
1,763

 
6,264

 
8,837

Operating expenses:
 

 
 

 
 
 
 
Research and development
3,684

 
3,057

 
10,654

 
8,754

Selling, general and administrative
2,508

 
2,579

 
8,158

 
8,892

Restructuring costs
77

 

 
246

 

Total operating expenses
6,269

 
5,636

 
19,058

 
17,646

Loss from operations
(5,027
)
 
(3,873
)
 
(12,794
)
 
(8,809
)
Interest expense
(35
)
 
(34
)
 
(64
)
 
(67
)
Interest income and other expense, net
(39
)
 
(17
)
 
(98
)
 
(79
)
Loss before income taxes
(5,101
)
 
(3,924
)
 
(12,956
)
 
(8,955
)
Provision for (benefit from) income taxes
(15
)
 
6

 
46

 
(18
)
Net loss
$
(5,086
)
 
$
(3,930
)
 
$
(13,002
)
 
$
(8,937
)
Net loss per share:
 

 
 

 
 
 
 
Basic
$
(0.09
)
 
$
(0.07
)
 
$
(0.23
)
 
$
(0.16
)
Diluted
$
(0.09
)
 
$
(0.07
)
 
$
(0.23
)
 
$
(0.16
)
Weighted average shares:
 

 
 

 
 
 
 
Basic
56,588

 
55,812

 
56,379

 
55,208

Diluted
56,588

 
55,812

 
56,379

 
55,208

 
See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

4

Table of Contents



QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Net loss
$
(5,086
)
 
$
(3,930
)
 
$
(13,002
)
 
$
(8,937
)
Total other comprehensive income, net of tax

 

 

 

Total comprehensive loss
$
(5,086
)
 
$
(3,930
)
 
$
(13,002
)
 
$
(8,937
)
 

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

5

Table of Contents

QUICKLOGIC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
Cash flows from operating activities:
 

 
 

Net loss
$
(13,002
)
 
$
(8,937
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
1,075

 
1,129

Stock-based compensation
1,496

 
1,750

Write-down of inventories
14

 
96

Gains on disposal of equipment

 
(2
)
Write-off of equipment
8

 
5

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(81
)
 
1,514

Inventories
2,566

 
(2,838
)
Other assets
421

 
291

Trade payables
397

 
(2,106
)
Accrued liabilities and deferred revenue
547

 
(635
)
Other long-term liabilities
51

 
(57
)
Net cash used in operating activities
(6,508
)
 
(9,790
)
Cash flows from investing activities:
 

 
 

Capital expenditures for property and equipment
(237
)
 
(525
)
Proceeds from sale of fixed assets

 
2

Net cash used in investing activities
(237
)
 
(523
)
Cash flows from financing activities:
 

 
 

Payment of debt and capital lease obligations
(258
)
 
(268
)
Stock issued under share-based compensation, net
394

 
4,334

Net cash provided by financing activities
136

 
4,066

Net (decrease) in cash and cash equivalents
(6,609
)
 
(6,247
)
Cash and cash equivalents at beginning of period
30,050

 
37,406

Cash and cash equivalents at end of period
$
23,441

 
$
31,159

 
 
 
 
Supplemental schedule of non-cash investing and financing activities :
 

 
 

Capital lease obligation to finance capital expenditures
$
349

 
$
448

Purchase of equipment included in accounts payable
$
125

 
$
33

 

See accompanying Notes to Condensed Unaudited Consolidated Financial Statements.

6

Table of Contents

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — The Company and Basis of Presentation
 
QuickLogic Corporation ("QuickLogic" or "the Company"), was founded in 1988 and reincorporated in Delaware in 1999. The Company develops and markets low-power programmable solutions that enable customers to add differentiated features and capabilities to their mobile, consumer and industrial products. The Company is a fabless semiconductor company that designs, markets and supports ultra-low power, customizable Sensor Hub, Display, and Connectivity semiconductor solutions for smartphone, tablet, wearable, and mobile enterprise, Original Equipment Manufacturers, or OEMs. Called Customer Specific Standard Products, or CSSPs, these programmable ‘silicon plus software’ solutions enable our customers to bring hardware-differentiated products to market quickly and cost effectively. The Company also develops and markets low-power Field Programmable Gate Arrays, or FPGAs, application solutions, associated design software and programming hardware.
 
The accompanying interim condensed consolidated financial statements are unaudited. In the opinion of management, these statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and include all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of results for the interim periods presented. The Company recommends that these interim condensed consolidated financial statements be read in conjunction with the Company's Form 10-K for the year ended December 28, 2014 . Operating results for the nine months ended September 27, 2015 are not necessarily indicative of the results that may be expected for the full year.

QuickLogic's fiscal year ends on the Sunday closest to December 31 and the fiscal quarters each end on the Sunday closest to the end of each calendar quarter. QuickLogic's third fiscal quarters for 2015 and for 2014 ended on Sunday, September 27, 2015 and September 28, 2014 , respectively.
 
Liquidity
 
The Company has financed its operations and capital investments through sales of common stock, capital and operating leases, and bank lines of credit. As of September 27, 2015 , the Company's principal sources of liquidity consisted of cash and cash equivalents of $23.4 million and $5.0 million in available credit under its revolving line of credit with Silicon Valley Bank, which expires on September 25, 2017. On September 25, 2015, the Company entered into a Second Amendment to Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank to extend the line of credit for two years through September 25, 2017. This amendment modifies some of the financial covenants. See Note 5 for information regarding the financial covenants. This line of credit provides for committed loan advances of up to $6.0 million , subject to increases at the Company's election of up to $12.0 million
 
The Company currently uses its cash to fund its capital expenditures and operating losses. Based on past performance and current expectations, the Company believes that its existing cash and cash equivalents, together with available financial resources from the revolving line of credit with Silicon Valley Bank will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months.

Over the longer term, the Company believes that its existing cash and cash equivalents, together with financial resources from its revolving line of credit with Silicon Valley Bank and its ability to sell additional shares to capital markets will be sufficient to satisfy its operations and capital expenditures.

The Company's liquidity is affected by many factors including, among others: the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry; the conversion of design opportunities into revenue; market acceptance of existing and new products; fluctuations in revenue as a result of product end-of-life; fluctuations in revenue as a result of the stage in the product life cycle of its customers' products; costs of securing access to and availability of adequate manufacturing capacity; levels of inventories; wafer and finished goods purchase commitments; customer credit terms; the amount and timing of research and development expenditures; the timing of new product introductions; production volumes; product quality; sales and marketing efforts; the value and liquidity of our investment portfolio; changes in operating assets and liabilities; the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities; the ability to raise funds from the sale of equity in the Company; the issuance and exercise of stock options and participation in the Company's employee stock purchase plan; and other factors related to the uncertainties of the industry and global economics. Accordingly,

7

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

there can be no assurance that events in the future will not require the Company to seek additional capital or, if so required, that such capital will be available on terms acceptable to the Company.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of QuickLogic and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Foreign Currency
 
The functional currency of the Company's non-U.S. operations is the U.S. dollar. Accordingly, all monetary assets and liabilities of these foreign operations are translated into U.S. dollars at current period-end exchange rates and non-monetary assets and related elements of expense are translated using historical exchange rates. Income and expense elements are translated to U.S. dollars using the average exchange rates in effect during the period. Gains and losses from the foreign currency transactions of these subsidiaries are recorded as interest income and other expense, net in the condensed unaudited consolidated statements of operations.
 
Uses of Estimates
 
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the period. Actual results could differ materially from those estimates, particularly in relation to revenue recognition, the allowance for doubtful accounts, sales returns, valuation of investments, valuation of long-lived assets, valuation of inventories including identification of excess quantities, market value and obsolescence, measurement of stock-based compensation awards, accounting for income taxes and estimating accrued liabilities.
 
Concentration of Risk
 
The Company's accounts receivable are denominated in U.S. dollars and are derived primarily from sales to customers located in North America, Asia Pacific, and Europe. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. See Note 11 for information regarding concentrations associated with accounts receivable.

For the three and nine months ended September 27, 2015 , the Company generated 57% and 44% of its total revenue from shipments to Samsung Electronics Co., Ltd. ("Samsung"). See Note 11 for information regarding concentrations associated with customers and distributors.


8

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 2 — Significant Accounting Policies
 
During the nine months ended September 27, 2015 , there were no changes in the Company's significant accounting policies from its disclosure in the Annual Report on Form 10-K for the year ended December 28, 2014 . For a discussion of the significant accounting policies, please see the Annual Report on Form 10-K for the fiscal year ended December 28, 2014 , filed with the Securities Exchange Commission, or SEC, on March 5, 2015 .

New Accounting Pronouncements     
    
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the measurement of Inventory, which amends the accounting guidance on the valuation of inventory. The guidance requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The Company is currently evaluating the impact of ASU 2015-11 on its consolidated financial statements and footnote disclosures.

In April 2015, the FASB issued ASU 2015-03, Simplifying Presentation of Debt Issuance Costs which amends the accounting guidance on the presentation of debt issuance costs. The guidance requires an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt, consistent with debt discounts. The guidance is effective for annual reporting periods beginning after December 31, 2015 and interim periods beginning after December 15, 2016, and must be applied retrospectively to each prior reporting period presented. The Company is currently evaluating the impact of ASU 2015-03 on its consolidated financial statements and footnote disclosures.
    
In February 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02) , which is intended to improve the targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations and securitization structures. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB accounting standards codification and improves the current U.S. GAAP by: placing more emphasis on risk of loss when determining a controlling financial interest; reducing the frequency of the application of related party guidance when determining a controlling financial interest in a variable interest entity, or VIE and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. This ASU 2015-02 is effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. Early adoption is permitted including adoption in an interim period. The Company is currently evaluating the impact of ASU 2015-02 on its consolidated financial statements and footnote disclosures.

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (ASU 2015-01) . This ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, requires that an entity separately classify, present and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of a reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show such item separately in the income statement, net of tax, after income from continuing operations. The entity is also required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. This ASU 2015-01 is effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. Early adoption is permitted provided that the adopted guidance is applied from the beginning of the annual year in which such guidance is adopted. The Company is currently evaluating the impact of ASU 2015-01 on its consolidated financial statements and footnote disclosures.

Other new accounting pronouncements are disclosed on the Annual Report on Form 10-K for the fiscal year ended December 28, 2014 filed with the SEC on March 5, 2015.
 

9

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 3 — Net Loss Per Share
 
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share was computed using the weighted average number of common shares outstanding during the period plus potentially dilutive common shares outstanding during the period under the treasury stock method. In computing diluted net income (loss) per share, the weighted average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options and warrants.

The following shares were not included in the calculation of diluted net loss per share for the third quarter and nine months ended September 27, 2015 and September 28, 2014 : (i) 6.8 million and 6.6 million of common shares associated with equity awards outstanding and the estimated number of shares to be purchased under the current offering period of the 2009 Employee Stock Purchase Plan, respectively, and (ii) warrants to purchase up to 2.3 million as of September 27, 2015 and 4.2 million as of September 28, 2014 shares of common stock respectively. These shares were not included as they were considered antidilutive due to the net loss the Company experienced during these periods.

Note 4 — Balance Sheet Components
 
As of
 
September 27,
2015
 
December 28,
2014
 
(in thousands)
Inventories:
 
 
 
Raw material
$

 
$

Work-in-process
1,660

 
1,191

Finished goods
712

 
3,761

 
$
2,372

 
$
4,952

Other current assets:
 
 
 
Prepaid expenses
$
714

 
$
1,042

Other
119

 
104

 
$
833

 
$
1,146

Property and equipment:
 
 
 
Equipment
$
13,618

 
$
14,047

Software
2,941

 
3,332

Furniture and fixtures
131

 
710

Leasehold improvements
713

 
595

 
17,403

 
18,684

Accumulated depreciation and amortization
(14,840
)
 
(15,467
)
 
$
2,563

 
$
3,217

 
 
 
 
Accrued liabilities:
 
 
 
Employee related accruals
$
1,804

 
$
1,356

Restructuring accruals - See Note 12
111

 

Other
114

 
218

 
$
2,029

 
$
1,574


10

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 5 — Obligations
 
As of
 
September 27,
2015
 
December 28,
2014
 
(in thousands)
Debt and capital lease obligations:
 

 
 

Revolving line of credit
$
1,000

 
$
1,000

Capital leases
349

 
416

 
1,349

 
1,416

Current portion of debt and capital lease obligations
(229
)
 
(225
)
Long term portion of debt and capital lease obligations
$
1,120

 
$
1,191

 
Revolving Line of Credit
 
On September 25, 2015 the Company entered into the Second Amendment to the Third Amended and Restated Loan and Security Agreement dated September 25, 2015 ("the Loan Agreement") with Silicon Valley Bank (the "Bank"). The terms of the Loan Agreement include a $6.0 million revolving line of credit available through September 25, 2017 . Upon each advance, the Company can elect a Prime Rate advance, which is the prime rate plus the prime rate margin, or a LIBOR advance, which is LIBOR rate plus the LIBOR rate margin. As of the end of the third quarter of 2015 , the Company had $1.0 million of revolving debt outstanding with an interest rate of 3.13% .
 
The Bank has a first priority security interest in substantially all of the Company's tangible and intangible assets to secure any outstanding amounts under the Third Loan Agreement. Under the terms of the Loan Agreement, the Company must maintain (i) a tangible net worth of at least $12 million , plus (a) 50% of the proceeds from any equity issuance, plus (b) 50% of the proceeds from any investments, tested as of the last day of each fiscal quarter; (ii) unrestricted cash or cash equivalents at the Bank or Bank's affiliates at all times in an amount of at least $6 million ; (iii) a ratio of quick assets to the results of (a) current liabilities minus (b) the current portion of deferred revenue, plus (c) the long-term portion of the obligations of at least 1.10 to 1.00, tested as of the last day of each month. The Loan Agreement also has certain restrictions including, among others, restrictions on the incurrence of other indebtedness, the maintenance of depository accounts, the disposition of assets, mergers, acquisitions, investments, the granting of liens, cash balances with subsidiaries and the payment of dividends. The Company was in compliance with the financial covenants of the Third Loan Agreement as of the end of the current reporting period.
 
Capital Leases

In July 2015, the Company leased design software under a three -year capital lease at an imputed interest rate of 4.91%  per annum. Terms of the agreement require the Company to make annual payments of approximately $67,300 through July 2017, for a total of $202,000 . As of September 27, 2015 , $125,000 was outstanding under the capital lease, of which $61,000 was classified as a current liability.

In July 2014, the Company leased design software under a 41-month capital lease at an imputed interest rate of 3.15%  per annum. Terms of the agreement require the Company to make payments of principal and interest of $42,000 in August 2014, $16,000 in December 2014, $58,000 in January 2016 and $58,000 in January 2017. The total payments for the lease will be $174,000 . As of September 27, 2015 , $110,000 was outstanding under this capital lease, of which $54,000 was classified as a current liability.

In May 2014, the Company leased design software under a three-year capital lease at an imputed interest rate of 4.80%  per annum. Terms of the agreement require the Company to make annual payments of approximately $84,000 through April 2016, for a total of $252,000 . As of September 27, 2015 , $80,000 was outstanding under the capital lease, all of which was classified as a current liability.

In December 2013, the Company leased design software under a two-year capital lease at an imputed interest rate of 4.34%  per annum. Terms of the agreement require the Company to make quarterly payments of approximately $34,000 through September 2015, for a total of $273,000 . As of September 27, 2015 , $34,000 was outstanding under the capital lease, all of which was classified as a current liability.



11

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Note 6 — Fair Value Measurements
 
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market and it considers assumptions that market participants would use when pricing the asset or liability.

The accounting guidance for fair value measurement also specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs), or reflect the Company's own assumptions of market participant valuation (unobservable inputs). The fair value hierarchy consists of the following three levels:
 
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
 
The following table presents the Company's financial assets that are measured at fair value on a recurring basis as of September 27, 2015 and December 28, 2014 , consistent with the fair value hierarchy provisions of the authoritative guidance (in thousands):
 
 
As of September 27, 2015
 
As of December 28, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Money market funds  (1)
$
21,550

 
$
343

 
$
21,207

 
$

 
$
29,425

 
$
874

 
$
28,551

 
$

Total assets
$
21,550

 
$
343

 
$
21,207

 
$

 
$
29,425

 
$
874

 
$
28,551

 
$

_________________
 
(1)             Money market funds are presented as a part of cash and cash equivalents on the accompanying consolidated balance sheets as of September 27, 2015 and December 28, 2014 .

Note 7 - Stockholders' Equity

Common Stock and Preferred Stock

The Company is authorized to issue 100 million shares of common stock and has 10 million shares of authorized but unissued shares of preferred stock. Without any further vote or action by the Company's stockholders, the Board of Directors has the authority to determine the powers, preferences, rights, qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock.

Issuance of Common Stock and Warrants

On July 31, 2013, the Company filed a shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities in one or more offerings up to a total dollar amount of $40.0 million . The Company's shelf registration statement was declared effective on August 30, 2013 and expires in August 2016.

In November 2013, the Company issued an aggregate of 8,740,000 shares of common stock, $0.001 par value, in an underwritten public offering at a price of $2.90 per share. The Company received net proceeds from the offering of approximately $23.1 million , net of underwriter's commission and other offering expenses of $2.2 million .


12


As of September 27, 2015 , 2.3 million warrants were outstanding. Approximately 1.9 million warrants with a strike price of $2.15 were issued in conjunction with a November 2009 financing. These warrants expired in May 2015. Approximately 2.3 million warrants with a strike price of $2.98 were issued in conjunction with a June 2012 financing. These warrants expire in June 2017. After August 2016, the warrants can only be exercised on a cashless basis.

Note 8 — Employee Stock Plans
  
1999 Stock Plan

The 1999 Stock Plan, or 1999 Plan, provided for the issuance of incentive and non-qualified options, restricted stock units (" RSUs") and restricted stock. Equity awards granted under the 1999 Plan have a term of up to ten years. Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each month of service thereafter. In March 2009, the Board adopted the 2009 Stock Plan, which was approved by the Company's stockholders on April 22, 2009. Effective April 22, 2009, no further stock options may be granted under the 1999 Plan.

2009 Stock Plan
 
The 2009 Stock Plan, or 2009 Plan, was amended and restated by the Board of Directors in January 2015 and approved by the Company's stockholders on April 23, 2015 to, among other things, reserve an additional 2.5 million shares of common stock for issuance under the 2009 Plan. As of September 27, 2015 , approximately 9.7 million shares were reserved for issuance under the 2009 Plan. Equity awards that are cancelled, forfeited or repurchased under the 1999 Plan become available for grant under the 2009 Plan, up to a maximum of an additional 10 million shares. Equity awards granted under the 2009 Plan have a term of up to ten years. Options typically vest at a rate of 25% one year after the vesting commencement date, and one forty-eighth for each month of service thereafter. RSUs typically vest at a rate of 25% one year after the vesting commencement date, and one eighth every six months thereafter. The Company may implement different vesting schedules in the future with respect to any new equity awards.
 
Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan, or 2009 ESPP, was adopted in March 2009. In January 2015, the 2009 ESPP was amended by the Board of Directors and approved by the Company's stockholders on April 23, 2015 to reserve an additional 1.0 million shares of common stock for issuance under the 2009 ESPP. As of September 27, 2015 , approximately 3.3 million shares were reserved for issuance under the 2009 ESPP Plan. The 2009 ESPP provides for six month offering periods. Participants purchase shares through payroll deductions of up to 20% of an employee's total compensation (maximum of 20,000 shares per offering period). The 2009 ESPP permits the Board of Directors to determine, prior to each offering period, whether participants purchase shares at: (i)  85% of the fair market value of the common stock at the end of the offering period; or (ii)  85% of the lower of the fair market value of the common stock at the beginning or the end of an offering period. The Board of Directors has determined that, until further notice, future offering periods will be made at  85% of the lower of the fair market value of the common stock at the beginning or the end of an offering period.

Note 9 — Stock-Based Compensation
 
The Company's equity incentive program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. The Company provides stock-based incentive compensation, or awards, to eligible employees and non-employee directors. Awards that may be granted under the program include non-qualified and incentive stock options, restricted stock units, or RSUs, performance-based restricted stock units, or PRSUs, and cash settlement of stock appreciation rights, or SARs. To date, awards granted under the program consist of stock options, RSUs and PRSUs. The majority of stock-based awards granted under the program vest over four years. Stock options granted under the program have a maximum contractual term of ten years.


13

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The stock-based compensation expense included in the Company's consolidated financial statements for the three and nine months ended September 27, 2015 and September 28, 2014 was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Cost of revenue
$
29

 
$
32

 
$
95

 
$
110

Research and development
210

 
176

 
613

 
750

Selling, general and administrative
240

 
244

 
759

 
890

Restructuring charges*
29

 

 
29

 

Total costs and expenses
$
508

 
$
452

 
$
1,496

 
$
1,750


 No stock-based compensation was capitalized during any period presented above.
* Stock-based compensation related to restructuring plan initiated in Q2-15.
 
Valuation Assumptions
 
The Company uses the Black-Scholes option pricing model to estimate the fair value of employee stock options and rights to purchase shares under the Company's 2009 ESPP. Using the Black-Scholes pricing model requires the Company to develop highly subjective assumptions including the expected term of awards, expected volatility of its stock, expected risk-free interest rate and expected dividend rate over the term of the award. The Company's expected term of awards assumption is based primarily on its historical experience with similar grants. The Company's expected stock price volatility assumption for both stock options and ESPP shares is based on the historical volatility of the Company's stock, using the daily average of the opening and closing prices and measured using historical data appropriate for the expected term. The risk-free interest rate assumption approximates the risk-free interest rate of a Treasury Constant Maturity bond with a maturity approximately equal to the expected term of the stock option or ESPP shares. This fair value is expensed over the requisite service period of the award. The fair value of RSUs and PRSUs is based on the closing price of the Company's common stock on the date of grant. Equity compensation awards which vest with service are expensed using the straight-line attribution method over the requisite service period.

In addition to the assumptions used in the Black-Scholes pricing model, the amended authoritative guidance requires that the Company recognize expense for awards ultimately expected to vest; therefore the Company is required to develop an estimate of the number of awards expected to be forfeited prior to vesting, or forfeiture rate. The forfeiture rate is estimated based on historical pre-vest cancellation experience and is applied to all share-based awards.
 
The following weighted average assumptions are included in the estimated fair value calculations for stock option grants:

 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Expected term (years)
4.78

 
6.19

 
4.78

 
6.19

Risk-free interest rate
1.40
%
 
1.98
%
 
1.40
%
 
1.98
%
Expected volatility
52.11
%
 
55.10
%
 
52.11
%
 
55.10
%
Expected dividend yield

 

 

 

 
No stock options were granted in the third quarter of 2015. The weighted average estimated fair value for options granted during the third quarter of 2014 was $2.10 per option. The weighted average estimated fair value for options granted during the first nine months of 2015 and 2014 was $0.90 and $2.10 , per option, respectively. As of September 27, 2015 and September 28, 2014 , the fair value of unvested stock options, net of expected forfeitures, was approximately $2.3 million and $1.9 million , respectively. This unrecognized stock-based compensation expense is expected to be recorded over a weighted average period of 2.17 years.


14

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Stock-Based Compensation Award Activity
 
The following table summarizes the activity in the shares available for grant under the 2009 Plan during the nine months ended September 27, 2015 :
 
 
Shares
Available for Grant
 
(in thousands)
Balance at December 28, 2014
1,139

Authorized
2,500

Options granted
(80
)
Options forfeited or expired
495

RSUs granted
(301
)
PRSUs granted
(21
)
RSUs forfeited or expired
52

Balance at September 27, 2015
3,784


Stock Options
 
The following table summarizes stock options outstanding and stock option activity under the 1999 Plan and the 2009 Plan, and the related weighted average exercise price, for the first nine months of 2015 :
 
 
Number of Shares
 
Weighted
Average Exercise
Price
 
Weighted
Average
Remaining Term
 
Aggregate
Intrinsic Value
 
(in thousands)
 
 
 
(in years)
 
(in thousands)
Balance outstanding at December 28, 2014
5,682

 
$
2.67

 
 
 
 
Granted
80

 
2.00

 
 
 
 
Forfeited or expired
(495
)
 
2.86

 
 
 
 
Exercised
(119
)
 
0.98

 
 
 
 
Balance outstanding at September 27, 2015
5,148

 
$
2.68

 
4.84
 
$
322

Exercisable at September 27, 2015
4,424

 
$
2.62

 
4.27
 
$
322

Vested and expected to vest at September 27, 2015
5,148

 
$
2.68

 
4.84
 
$
322

 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of $1.65 as of the end of the Company's current reporting period, which would have been received by the option holders had all option holders exercised their options as of that date.
 
The total intrinsic value of options exercised during the first nine months of 2015 and 2014 was $83,000 and $3.7 million , respectively. Total cash received from employees as a result of employee stock option exercises during the first nine months of 2015 and 2014 was approximately $117,000 and $4.3 million respectively. The Company settles employee stock option exercises with newly issued common shares. In connection with these exercises, there was no tax benefit realized by the Company due to the Company's current loss position. Total stock-based compensation related to stock options was $218,000 and $677,000 for the three months and nine months ended September 27, 2015 .
 
Restricted Stock Units and Performance-based Restricted Stock Units
 
The Company began issuing RSUs and PRSUs in the third quarter of 2007. RSUs entitle the holder to receive, at no cost, one common share for each RSU as it vests. In general, the Company's policy is to withhold shares in settlement of employee tax withholding obligations upon the vesting of RSUs. The stock-based compensation related to RSUs and PRSUs was $199,000 and $23,000 , for the three months and $542,000 and $58,000 for the nine months ended September 27, 2015 ,

15

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

respectively. As of September 27, 2015 , there was $1.5 million in unrecognized compensation expense related to RSUs and PRSUs.

A summary of activity for the Company's RSUs and PRSUs for the nine months ended September 27, 2015 and information regarding RSUs and PRSUs outstanding and expected to vest as of September 27, 2015 is as follows:

 
RSUs & PRSUs Outstanding
 
Number of Shares
 
Weighted Average
Grant Date Fair Value
 
(in thousands)
 
 
Nonvested at December 28, 2014
650

 
$
3.47

Granted
322

 
1.85

Vested
(80
)
 
1.83

Forfeited
(52
)
 

Nonvested at September 27, 2015
840

 
$
3.03


Employee Stock Purchase Plan
 
The weighted average estimated fair value, as defined by the amended authoritative guidance, of rights issued pursuant to the Company's 2009 ESPP during the third quarters of 2015 and 2014 was $0.48 and $1.01 per right, respectively.

As of September 27, 2015 , 1,634,000 shares remained available for issuance under the 2009 ESPP including 1.0 million additional shares authorized in the second quarter. For the third quarter and nine months ended September 27, 2015 , the Company recorded stock-based compensation expense related to the 2009 ESPP of $68,000 and $219,000 , respectively.
 
The fair value of rights issued pursuant to the Company's 2009 ESPP was estimated on the commencement date of each offering period using the following weighted average assumptions:
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Expected term (months)
6.08

 
6.09

 
6.08

 
6.09

Risk-free interest rate
0.08
%
 
0.05
%
 
0.08
%
 
0.05
%
Volatility
51.54
%
 
49.17
%
 
51.54
%
 
49.17
%
Dividend yield

 

 

 

 
As of September 27, 2015 , the unrecognized stock-based compensation expense relating to the Company's 2009 ESPP was $36,000 and is expected to be recognized over a weighted average period of approximately 1.6 months.

Note 10 — Income Taxes
 
In the third quarters of 2015 and 2014 , the Company recorded a net income tax benefit of $15,000 and income tax expense of $6,000 , respectively. For the nine months ended September 27, 2015 and September 28, 2014 , the Company recorded net income tax expense of $46,000 and a net income tax benefit of $18,000 , respectively. The income tax benefit for the third quarter of 2015 includes the net effect of the following: (i) income taxes from its foreign operations which are cost-plus entities; and (ii) the release of an unrecognized tax benefit in the period. The income tax expense for the third quarter of 2014 relates to income taxes from the Company's foreign operations, which are cost-plus entities.

Based on the available objective evidence, management believes it is more likely than not that the Company's net deferred tax assets will not be fully realizable. Accordingly, with the exception of its foreign subsidiaries, the Company has provided a full valuation allowance against the associated deferred tax assets. The Company will continue to assess the realizability of the deferred tax assets in future periods.


16

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

 The Company had approximately $36,000 and $51,000 of unrecognized tax benefits at September 27, 2015 and December 28, 2014 , respectively, which will result in a change in the Company's effective tax rate if recognized in future years. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the nine month period ended September 27, 2015 , the Company accrued $3,000 of interest and penalties. As of September 27, 2015 , the Company had approximately $16,000 of accrued interest and penalties related to uncertain tax positions.

Included in the balance of unrecognized tax benefits at September 27, 2015 is $9,000 related to tax positions, interest, and penalties for which it is reasonably possible that the statute of limitations for these items will expire in various jurisdictions within the next twelve months.

The Company is subject to U.S. federal income tax as well as income taxes in many U.S. states and foreign jurisdictions in which the Company operates. As of December 28, 2014, fiscal years 2010 onward remain open to examination by the U.S. taxing authorities and fiscal years 2006 onward remain open to examination in Canada. The U.S. federal and U.S. state taxing authorities may choose to audit tax returns for tax years beyond the statute of limitation period due to significant tax attribute carryforwards from prior years, making adjustments only to carryforward attributes.
 
Note 11 — Information Concerning Product Lines, Geographic Information and Revenue Concentration
 
The Company identifies its business segment based on business activities, management responsibility and geographic location. For all periods presented, the Company operated in a single reportable business segment.
 
The following is a breakdown of revenue by product line (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27, 2015
 
September 28,
2014
Revenue by product line (1) :
 

 
 

 
 
 
 
New products
$
2,855

 
$
2,236

 
$
9,952

 
$
15,634

Mature products
1,339

 
1,888

 
5,374

 
6,490

Total revenue
$
4,194

 
$
4,124

 
$
15,326

 
$
22,124

_________________
 
(1)                     For all periods presented:  New products include all products manufactured on 180 nanometer or smaller semiconductor processes. Mature products include all products produced on semiconductor processes larger than 180 nanometers.

The following is a breakdown of revenue by shipment destination (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27, 2015
 
September 28, 2014
Revenue by geography:
 

 
 

 
 
 
 
Asia Pacific  (1)
$
3,044

 
$
2,341

 
$
10,334

 
$
16,179

North America  (2)
690

 
1,084

 
3,619

 
3,158

Europe
460

 
699

 
1,373

 
2,787

Total revenue
$
4,194

 
$
4,124

 
$
15,326

 
$
22,124

___________

(1)      Asia Pacific includes revenue from South Korea of $2.4 million , or 58% , of total revenue and $1.1 million , or 28% , of total revenue for the quarters ended September 27, 2015 and September 28, 2014, respectively. For the nine months ended September 27, 2015 and September 28, 2014, revenue from South Korea was $6.9 million , or 45% , of total revenue and $11.6 million , or 52% , respectively.
(2)     North America includes revenue from the United States of $665,000 , or 16% , of total revenue and $974,000 , or 24% , for the quarters ended September 27, 2015 and September 28, 2014, respectively. For the nine months ended September 27, 2015 and September 28, 2014, revenue from United States was $3.5 million , or 23% , and $2.9 million , or 13% , respectively.

17

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


The following distributors and customers accounted for 10% or more of the Company's revenue for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27, 2015
 
September 28, 2014
Distributor "A"
15
%
 
26
%
 
24
%
 
15
%
Distributor "B"
*

 
12
%
 
*

 
*

Customer "B"
10
%
 
13
%
 
14
%
 
*

Customer "G"
57
%
 
27
%
 
44
%
 
53
%

 
*
Represents less than 10% of revenue for the period presented.
 
The following distributors and customers accounted for 10% or more of the Company's accounts receivable as of the dates presented:
 
September 27,
2015
 
December 28,
2014
Distributor "A"
27
%
 
34
%
Customer "G"
45
%
 
28
%
 
As of September 27, 2015 , less than 10% of the Company's long-lived assets, including property and equipment and other assets, were located outside the United States.

Note 12 — Restructuring Charges

In June 2015, the Company implemented a restructuring plan to re-align the organization to support the Company's sensor processing provider business model and growth strategy. This re-alignment resulted in a reduction of nine employees or 9% of the Company's global workforce. Pursuant to the restructuring plan, the Company initially recorded $169,000 of restructuring liabilities, consisting primarily of employee severance related costs. In the third quarter the Company incurred additional restructuring charges of $77,000 and paid-off $131,000 of the liabilities previously accrued. The additional restructuring charges in the third quarter were primarily related to the closing of its Canadian subsidiary at the end of 2015. The restructuring liabilities are included in the "Liabilities" line item in the consolidated balance sheet. The activities affecting the restructuring liabilities for the nine months ended September 27, 2015 are summarized as follows:

 
Restructuring Liabilities
 
(In Thousands)
Balance at December 28, 2014
$

Accruals
246

Payments and non-cash items adjustments
(131
)
FX translation adjustment
(4
)
Balance at September 27, 2015
$
111


Note 13 — Commitments and Contingencies

 Commitments

The Company's manufacturing suppliers require us to forecast wafer starts several months in advance. The Company is required to take delivery of and pay for a portion of forecasted wafer volume. As of September 27, 2015 , and December 28, 2014 , the Company had $3.2 million and $552,000 , respectively, of outstanding commitments for the purchase of wafer and finished goods inventory.


18

QUICKLOGIC CORPORATION
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The Company has obligations with certain suppliers for the purchase of other goods and services entered into in the ordinary course of business. As of September 27, 2015 , total outstanding purchase obligations were $1.8 million , of which $1.6 million were due within the next twelve months.

The Company leases its primary facility under a non-cancelable operating lease that expires at the end of 2018. In addition, the Company rents development facilities in India as well as sales offices in Europe and Asia. Total rent expense, net of sublease income, for the third quarters of 2015 and 2014 was approximately $201,000 and $239,000 , respectively. Total rent expense, net of sublease income, for the first nine months of 2015 and 2014 was $678,000 and $710,000 , respectively.

As of September 27, 2015 , future minimum lease commitments under the Company's operating leases, excluding property taxes and insurance are as follows:
 
 
Operating
Leases
 
(in thousands)
Fiscal Years
 

2015 (Remaining 3 months)
$
199

2016
706

2017
628

2018
641

 
$
2,174


Contingencies
    
One of the Company's licensors contends that the Company owes back royalties on sales of the Company's ArcticLink III VX devices. Based on the terms and conditions of the Amended and Restated License Agreement between the parties, the Company does not believe it is liable for any royalty payments on these sales. The parties have agreed to mediate the matter and are in the process of selecting a mediator. As of September 27, 2015, the Company estimates the possible loss relating to this matter to be in the range of $25,000 and $250,000 .

Note 14 — Litigation
 
From time to time, the Company may become involved in legal actions arising in the ordinary course of business including, but not limited to, intellectual property infringement and collection matters. Absolute assurance cannot be given that any such third party assertions will be resolved: (i) without costly litigation; (ii) in a manner that is not adverse to the Company's financial position, results of operations or cash flows; or (iii) without requiring royalty or other payments which may adversely impact gross profit.


19


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

  Forward-Looking Statements

The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbor created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include statements regarding our strategies as well as (1) our revenue levels, including the commercial success of our Customer Specific Standard Products, or CSSPs, and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our research and development efforts, (5) our gross profit and factors that affect gross profit, (6) our level of operating expenses, (7) our partners and suppliers and (8) industry trends. The following discussion should be read in conjunction with the attached condensed unaudited consolidated financial statements and notes thereto, and with our condensed audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2014 , found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 5, 2015 . Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview
 
We develop and market low-power customizable semiconductor solutions that: enable customers to add new differentiated features; enable always-on and contextually aware sensor applications; extend battery life; and improve the customer's visual experience with their mobile, consumer and enterprise products. Our targeted mobile market segment includes Smartphones, Tablets, Wearables, and Mobile Enterprise. Our solutions typically fall into one of three product categories: Display and Visual Enhancement; Smart Connectivity; and Ultra-Low Power Sensor Hubs. We are a fabless semiconductor company that designs Customer Specific Standard Products, or CSSPs, which are complete, customer-specific solutions that include one or more of the following: a combination of silicon solution platforms; Proven System Blocks, or PSBs; customer-specific logic; the SenseMe TM algorithm library; software drivers; and firmware. Our main platform families, EOS TM , ArcticLink ® and PolarPro ® , are standard silicon platforms. Recent examples of PSBs that have been developed and that are available to customers include PSBs that drive one or more Light Emitting Diodes, or LEDs, Barcode transmission via InfraRed (IR) LED, and TV remote control via LED. The variety of PSBs offered by us allows system designers to combine multiple discrete chips onto a single CSSP thereby simplifying design and board layout, lowering bill of material cost, and accelerating time-to-market. The programmable logic of the platforms is used for adding differentiated features and provides flexibility to address hardware-based product requirements quickly.

Utilizing a focused customer engagement model, we market CSSPs to Original Equipment Manufacturers, or OEMs, and Original Design Manufacturers, or ODMs, that offer differentiated mobile products, and to processor vendors that wish to expand their served available market through the deployment of reference designs to their customers. Our solutions enable OEMs and ODMs to add new features, deploy sensor-enabled applications, extend battery life, and improve the visual experience of their handheld mobile devices. In addition to working directly with our customers, we partner with other companies with expertise in certain technologies to develop additional intellectual property, reference platforms, and system software to provide application solutions.

We work with mobile processor manufacturers and sensor suppliers in the development of reference designs. Through the use of reference designs that incorporate our CSSPs, we believe mobile processor manufacturers can expand the served

20

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

available market for their processors. In the event that a CSSP development with a processor manufacturer or a set of sensor vendors is applicable to a set of common OEMs or ODMs, we can amortize our research and development investment over that set of OEMs/ODMs. We call this type of solution a Catalog CSSP. We are placing a greater emphasis on developing and marketing Catalog CSSPs in the future.

In order to grow our revenue from its current level, we depend upon increased revenue from our new products, including sensor processing solution platforms and existing new product platforms. We expect our business growth to be driven by ultra-low power programmable sensor processing solutions and our sensor processing solutions revenue growth needs to be strong enough to enable us to sustain profitability while we continue to invest in the development, sales and marketing of our new solution platforms, PSBs, algorithms, firmware, and new CSSPs. The gross margin associated with our CSSPs is generally lower than the gross margin of our FPGA products, due primarily to the price sensitive nature of the higher volume mobile consumer opportunities that we are pursuing with CSSPs.

During the third quarter of 2015 , we generated total revenue of $4.2 million . This represents a decrease of 16% from the prior quarter and an increase of 2% over the third quarter of 2014 . Our new product revenue was $2.9 million , down 3% sequentially and up 28% year over year. The sequential decrease of new product revenue was primarily due to a larger than expected decline in smart connectivity solutions, partially offset by increased shipments of sensor processing and display bridge solutions. The year over year increase was primarily due to increased revenue from shipments of our ArcticLink III display bridge solutions to Samsung, which increased by $1.2 million in the third quarter as compared to the third quarter of 2014. We anticipate new product revenue generated from our display bridge solution and smart connectivity solutions will continue to fluctuate depending on the demand in the Android tablet market.
For the third quarter of 2015 , revenue generated from Samsung accounted for 83% of our new product revenue and 57% of our total revenue compared to 69% and 41%, respectively, for the second quarter of 2015. During the third quarter of 2015, new products were shipped into the Tablet, Smartphone and Mobile Enterprise markets. Our mature product revenue was $1.3 million , a decrease of 34% sequentially and 29% year over year. We devote substantially all of our development, sales and marketing efforts to our new sensor processing solution platforms, PSBs and CSSPs. Overall, we reported a net loss of $5.1 million for the third quarter of 2015 compared to a net loss of $3.9 million for the third quarter of 2014 primarily due to lower revenue level and increased R&D investments in our new sensor processing solution platforms.

Critical Accounting Estimates
 
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our critical policies include revenue recognition, valuation of inventories including identification of excess quantities and product obsolescence, valuation of investments, valuation of long-lived assets, measurement of stock-based compensation and estimation of accrued liabilities. We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented. However, any factual errors or errors in these judgments and estimates may have a material impact on our financial statements. For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014 , filed with the SEC on March 5, 2015 .


21

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

Results of Operations
 
The following table sets forth the percentage of revenue for certain items in our condensed consolidated statements of operations for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
 
September 27, 2015
 
September 28, 2014
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue
70
 %
 
57
 %
 
59
 %
 
60
 %
Gross profit
30
 %
 
43
 %
 
41
 %
 
40
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
88
 %
 
74
 %
 
70
 %
 
40
 %
Selling, general and administrative
60
 %
 
63
 %
 
53
 %
 
40
 %
Restructuring Costs
2
 %
 
 %
 
2
 %
 
 
Loss from operations
(119
)%
 
(94
)%
 
(84
)%
 
(40
)%
 
 
 
 
 
 
 
 
Interest expense
(1
)%
 
(1
)%
 
 %
 
 %
Interest income and other expense, net
(1
)%
 
 %
 
(1
)%
 
(1
)%
Loss before income taxes
(121
)%
 
(95
)%
 
(85
)%
 
(41
)%
Provision for income taxes
 %
 
*

 
 %
 
(1
)%
Net loss
(121
)%
 
(95
)%
 
(85
)%
 
(40
)%

_____________        
Insignificant percentages are rounded to zero percentage (-%) for disclosure.

22

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

Three Months Ended September 27, 2015 and September 28, 2014
 
Revenue
 
The table below sets forth the changes in revenue for the three months ended September 27, 2015 , as compared to the three months ended September 28, 2014 (in thousands, except percentage data):
 
 
Three Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
 
Amount
 
% of Total
Revenues
 
Amount
 
% of Total
Revenues
 
Amount
 
Percentage
Revenue by product line (1) :
 
 
 
 
 
 
 
 
 
 
 
New products
$
2,855

 
68
%
 
$
2,236

 
54
%
 
$
619

 
28
 %
Mature products
1,339

 
32
%
 
1,888

 
46
%
 
(549
)
 
(29
)%
Total revenue
$
4,194

 
100
%
 
$
4,124

 
100
%
 
$
70

 
2
 %
_________________
 
(1)          For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes. Mature products include all products produced on semiconductor processes larger than 180 nanometers.

The $619,000 increase in new product revenue was primarily due to increased shipments of our ArcticLink III display bridge solution platform to Samsung for certain Android tablets, partially offset by lower shipments of our smart connectivity solutions. Revenue from Samsung in the third quarter of 2015 was $2.4 million compared to $1.1 million in the third quarter of 2014. Revenue from our other new products in the third quarter of 2015 was $479,000 compared to $1.1 million in the same period of 2014. The impact of lower sales price on the revenue of the third quarter of 2015 was approximately $278,000, or 7% of total revenue, compared to the third quarter of 2014. The Company's revenue from Samsung accounted for 83% of new product revenue and 57% of total revenue in the third quarter of 2015 . The $549,000 decrease in mature product revenue was primarily due to decreased orders from our customers in the aerospace, test and instrumentation sectors.

We continue to seek to expand our revenue through the pursuit of high volume sales opportunities in our target market segments, including the sale of sensor processing solution platforms. Our industry is characterized by intense price competition and by lower margins as order volumes increase. Due to the concentration of our new product revenue in Samsung, combined with the cyclical nature of the mobile market, we have experienced significant fluctuations in new product revenue. While winning large-volume sales opportunities will increase our revenue, due to the pricing negotiation leverage of large companies, these opportunities may decrease our gross profit as a percentage of revenue. In addition, these large companies provide longer-term purchase forecasts which are not binding and may not result in revenue.

Gross Profit
 
The table below sets forth the changes in gross profit for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014 (in thousands, except percentage data):

 
Three Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
 
Amount
 
% of Total
Revenues
 
Amount
 
% of Total
Revenues
 
Amount
 
Percentage
Revenue
$
4,194

 
100
%
 
$
4,124

 
100
%
 
$
70

 
2
 %
Cost of revenue
2,952

 
70
%
 
2,361

 
57
%
 
591

 
25
 %
Gross Profit
$
1,242

 
30
%
 
$
1,763

 
43
%
 
$
(521
)
 
(30
)%

The $521,000 decrease in gross profit in absolute dollars and the 13% decrease in the gross margin as a percentage of revenue during the third quarter of 2015 , as compared to the third quarter of 2014 , was primarily due to the decrease in revenue from our mature products, which carry extremely high margin. The impact of lower sales price on the gross profit of the third quarter of 2015 was approximately $278,000, or 7%, compared to the third quarter of 2014. The sale of previously reserved inventory was $49,000 and $144,000 in the third quarters of 2015 and 2014 , respectively.

23

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)


Our semiconductor products have historically had long product life cycles and obsolescence has not been a significant factor in the valuation of inventories. However, as we continue to pursue opportunities in the mobile market and develop new CSSPs and products, our product life cycle will be shorter and the risk of obsolescence will increase. 

We regularly review the cost of inventories and purchase commitments against estimated market value and record a lower of cost or market reserve for inventories that have a cost in excess of estimated market value. This could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down. In general, our standard manufacturing lead times are longer than the binding forecasts we receive from customers. The revenue fluctuations we have experienced with Samsung have increased the risk of inventory obsolescence of our ArcticLink III display solution platform family.
 
Operating Expenses
 
The table below sets forth the changes in operating expenses for the three months ended September 27, 2015 , as compared to the three months ended September 28, 2014 (in thousands, except percentage data):
 
 
Three Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
 
Amount
 
% of Total
Revenues
 
Amount
 
% of Total
Revenues
 
Amount
 
Percentage
R&D expense
$
3,684

 
88
%
 
$
3,057

 
74
%
 
$
627

 
21
 %
SG&A expense
2,508

 
60
%
 
2,579

 
63
%
 
(71
)
 
(3
)%
Restructuring charges
77

 
2
%
 

 
%
 
77

 
100
 %
Total operating expenses
$
6,269

 
150
%
 
$
5,636

 
137
%
 
$
633

 
11
 %

Research and Development
 
Our research and development, or R&D, expenses consist primarily of personnel, overhead and other costs associated with engineering process improvements, sensor hub and algorithm development, programmable logic design, CSSP design and software development. The $627,000 increase in R&D expenses in the third quarter of 2015 , as compared to the third quarter of 2014 , was primarily attributable to a $320,000 increase in compensation expenses due to increased headcount, a $178,000 increase in third-party chip design costs, and an increase in IP purchases of $115,000. We expect our R&D expenses to continue to increase due to new sensor processing solution platforms development.

Selling, General and Administrative Expense
 
Our selling, general and administrative, or SG&A, expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $71,000 decrease in SG&A expenses in the third quarter of 2015 , as compared to the third quarter of 2014 , was primarily due to lower occupancy costs of $54,000, lower supply costs of $35,000, and lower employee related costs of $30,000, partially offset by higher depreciation costs of $39,000.

Restructuring Charges

In June 2015, the Company implemented a restructuring plan to re-align the organization to support the Company's sensor processing provider business model and growth strategy. This re-alignment resulted in a reduction of nine employees or 9% of the Company's global workforce. Pursuant to the restructuring plan, the Company initially recorded $169,000 of restructuring liabilities, consisting primarily of employee severance related costs. In the third quarter we incurred additional restructuring charges of $77,000 and paid-off $131,000 of the liabilities previously accrued. The additional restructuring charges in the third quarter were primarily related to the closing of its Canadian subsidiary at the end of 2015. The restructuring liabilities are included in the "Accrual Liabilities" line item in the consolidated balance sheet. Please see Note 12 of the Condensed Unaudited Consolidated Financial Statements for further details.

Interest Expense and Interest Income and Other Expense, Net
 

24

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

The table below sets forth the changes in interest expense and interest income and other expense, net, for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014 (in thousands, except percentage data):
 
 
Three Months Ended
 
Change
 
September 27,
2015
 
September 28,
2014
 
Amount
 
Percentage
Interest expense
$
(35
)
 
$
(34
)
 
$
(1
)
 
3
%
Interest income and other expense, net
(39
)
 
(17
)
 
(22
)
 
129
%
 
$
(74
)
 
$
(51
)
 
$
(23
)
 
45
%
 
The increase in interest income and other expenses,net was primarily due to foreign exchange losses from the transactions of our foreign subsidiaries.
 
We conduct a portion of our research and development activities in Canada and India and we have sales and marketing activities in various countries outside of the United States. Most of these international expenses are incurred in local currency. Foreign currency transaction gains and losses are included in interest and other income (expense), net, as they occur. We do not use derivative financial instruments to hedge our exposure to fluctuations in foreign currency and, therefore, our results of operations are, and will continue to be, susceptible to fluctuations in foreign exchange gains or losses. Historically, impact of foreign exchange fluctuations on the profit or loss has been immaterial.
 
Provision for (Benefit from) Income Taxes
 
The table below sets forth the changes in the income tax provision (benefit) for the three months ended September 27, 2015 as compared to the three months ended September 28, 2014 (in thousands, except percentage data):

 
Three Months Ended
 
Change
 
September 27,
2015
 
September 28,
2014
 
Amount
 
Percentage
Provision for (Benefit from) income taxes
$
(15
)
 
$
6

 
$
(21
)
 
(350
)%

The income tax benefit for the third quarter of 2015 was primarily from a release of tax contingency reserves where the statute of limitations has expired, offset by tax on foreign operations which are cost plus entities. The income tax expense for the third quarter of 2014 was primarily from our foreign operations which are cost plus entities.

As of September 27, 2015 , our ability to utilize our income tax loss carryforwards in future periods is uncertain. Accordingly, we recorded a full valuation allowance against the related U.S. tax provision. We will continue to assess the realizability of deferred tax assets in future periods.


25

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

Nine Months Ended September 27, 2015 and September 28, 2014

Revenue
 
The table below sets forth the changes in revenue for the nine months ended September 27, 2015 , as compared to the nine months ended September 28, 2014 (in thousands, except percentage data):

 
Nine Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
 
Amount
 
% of Total
Revenues
 
Amount
 
% of Total
Revenues
 
Amount
 
Percentage
Revenue by product line (1) :
 
 
 
 
 
 
 
 
 
 
 
New products
$
9,952

 
65
%
 
$
15,634

 
71
%
 
$
(5,682
)
 
(36
)%
Mature products
5,374

 
35
%
 
6,490

 
29
%
 
(1,116
)
 
(17
)%
Total revenue
$
15,326

 
100
%
 
$
22,124

 
100
%
 
$
(6,798
)
 
(31
)%
 
_________________
 
(1)                For all periods presented: New products include all products manufactured on 180 nanometer or smaller semiconductor processes. Mature products include all products produced on semiconductor processes larger than 180 nanometers.

 
The $5.7 million decrease in new product revenue was primarily driven by lower shipments of our display bridge solutions and smart connectivity solutions. For the nine month period ended September 27, 2015 , revenue from our ArcticLink III devices primarily sold to Samsung was $6.9 million compared to $12.1 million in the nine month period ended September 28, 2014. The impact of lower sales price on revenue decrease was approximately $625,000, or 4% on first nine months of 2015, compared to first nine months of 2014. Revenue generated from Samsung for the nine months period ended September 27, 2015 accounted for 69% of new product revenue and 44% of total revenue. The $1.1 million decrease in mature product revenue was due primarily to reduced orders from our customers in the aerospace, test and instrumentation sectors.

We continue to seek to expand our revenue through the pursuit of high volume sales opportunities in our target market segment, including the sale of our new sensor processing solution platforms. Our industry is characterized by intense price competition and lower margins as order volumes increase. While winning large-volume sales opportunities will increase our revenue, due to the pricing negotiation leverage of large companies, these opportunities may decrease our gross profit as a percentage of revenue.

Gross Profit
 
The table below sets forth the changes in gross profit for the nine months ended September 27, 2015 as compared to the nine months ended September 28, 2014 (in thousands, except percentage data):
 
 
Nine Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
 
Amount
 
% of Total
Revenues
 
Amount
 
% of Total
Revenues
 
Amount
 
Percentage
Revenue
$
15,326

 
100
%
 
$
22,124

 
100
%
 
$
(6,798
)
 
(31
)%
Cost of revenue
9,062

 
59
%
 
13,287

 
60
%
 
(4,225
)
 
(32
)%
Gross Profit
$
6,264

 
41
%
 
$
8,837

 
40
%
 
$
(2,573
)
 
(29
)%
 
The increase in gross margin as a percentage of revenue by 1% in the first nine months of 2015 compared to the first nine months of 2014 was primarily due to product mix change with a higher percentage of revenue being derived from higher margin mature products. The $2.6 million decrease in gross profit in the first nine months of 2015 compared to the first nine months of 2014 was primarily due to the decrease in high margin mature product revenue and other new product revenue including smart connectivity solutions. The impact of lower sales price on the gross profit of the first nine months of 2015 was approximately $625,000, or 4%, compared to the first nine month of 2014. Inventory reserve provisions were $14,000 and

26

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

$96,000 in the first nine months of 2015 and 2014 , respectively. The sale of previously reserved inventories was $170,000 and $496,000 in the first nine months of 2015 and 2014 , respectively.
 
Operating Expenses

The table below sets forth the changes in operating expenses for the nine months ended September 27, 2015 as compared to the nine months ended September 28, 2014 (in thousands, except percentage data):
 
 
Nine Months Ended
 
 
 
 
 
September 27, 2015
 
September 28, 2014
 
Change
 
Amount
 
% of Total
Revenues
 
Amount
 
% of Total
Revenues
 
Amount
 
Percentage
R&D expense
$
10,654

 
63
%
 
$
8,754

 
40
%
 
$
1,900

 
22
 %
SG&A expense
8,158

 
51
%
 
8,892

 
40
%
 
(734
)
 
(8
)%
Restructuring Charges
246

 
2
%
 

 
%
 
246

 
100
 %
Total operating expenses
$
19,058

 
116
%
 
$
17,646

 
80
%
 
$
1,412

 
8
 %
 
Research and Development
 
The $1.9 million increase in R&D expenses in the first nine months of 2015 as compared to the first nine months of 2014 was attributable primarily to a $1.3 million increase in compensation expenses related to increased hiring in our software and algorithm group; an increase in third-party chip design costs of $1.1 million, partially offset by a decrease in IP purchase costs of $211,000; and a decrease in stock-based compensation of $265,000.

Selling, General and Administrative Expense
 
The $734,000 decrease in SG&A expenses in the first nine months of 2015 as compared to the first nine months of 2014 was primarily due to a decrease of $562,000 in administrative consulting expenses related to accounting, legal and recruiting, a decrease of stock-based compensation of $571,000 related to reduced headcount in finance personnel, and a decrease of occupancy costs of $94,000, partially offset by increased compensation costs of $284,000 related to sales and marketing, and increased MIS consulting expenses of $198,000.

Interest Expense and Interest Income and Other, Net
 
The table below sets forth the changes in interest expense and interest income and other, net, for the nine months ended September 27, 2015 , as compared to the nine months ended September 28, 2014 (in thousands, except percentage data):
 
 
Nine Months Ended
 
Change
 
September 27,
2015
 
September 28,
2014
 
Amount
 
Percentage
Interest expense
$
(64
)
 
$
(67
)
 
$
3

 
(4
)%
Interest income and other, net
(98
)
 
(79
)
 
(19
)
 
24
 %
 
$
(162
)
 
$
(146
)
 
$
(16
)
 
11
 %
 
The increase in interest expense was due primarily to the changes in interest rates on our line of credit in the first nine months of 2015 compared to the first nine months of 2014 . The increase in interest income and other, net was due primarily to the foreign exchange losses in the first nine months of 2015 as compared to the first nine months of 2014 .


27

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

Provision for (Benefit from) Income Taxes

The table below sets forth the changes for income taxes provision (benefit) for the nine months ended September 27, 2015 , as compared to the nine months ended September 28, 2014 (in thousands, except percentage data):

 
Nine Months Ended
 
Change
 
September 27,
2015
 
September 28,
2014
 
Amount
 
Percentage
Provision for (Benefit from) Income Taxes
$
46

 
(18
)
 
$
64

 
(356
)%

The income tax provision for the nine months ended September 27, 2015 , was primarily from our foreign operations which are cost-plus entities. The income tax benefit for the nine months ended September 28, 2014 , was primarily from a release of tax contingency reserves where the statute of limitations has expired, offset by tax on foreign operations which are cost plus entities.

As of September 27, 2015 , our ability to utilize our income tax loss carryforwards in future periods is uncertain. Accordingly, we recorded a full valuation allowance against the related U.S. tax provision. We will continue to assess the realizability of deferred tax assets in future periods.

Liquidity and Capital Resources
 
We have financed our operating losses and capital investments through sales of common stock, private equity investments, capital and operating leases, a revolving line of credit and cash flows from operations. As of September 27, 2015 , our principal sources of liquidity consisted of our cash and cash equivalents of $23.4 million and available credit under our $5.0 million revolving line of credit with Silicon Valley Bank, which expires on September 25, 2017 .

On September 25, 2015, the Company entered into a Second Amendment to Third Amended and Restated Loan and Security Agreement (the "Loan Agreement") with Silicon Valley Bank, (the "Bank") to extend the line of credit for two years through September 25, 2017. The Second Amendment to the Loan Agreement provides for committed loan advances of up to $6.0 million, subject to increases at the Company's election of up to $12.0 million. Under the Loan Agreement, the Company must maintain (i) a tangible net worth of at least $12 million , plus (a) 50% of the proceeds from any equity issuance, plus (b) 50% of the proceeds from any investments, tested as of the last day of each fiscal quarter; (ii) unrestricted cash or cash equivalents at the Bank or Bank's affiliates at all times in an amount of at least $6 million ; (iii) a ratio of quick assets to the results of (a) current liabilities, minus (b) the current portion of deferred revenue, plus (c) the long-term portion of the obligations of at least 1.10 to 1.00, tested as of the last day of each month. Upon each advance, the Company can elect one of two interest rates: (i) the prime rate plus the prime rate margin, or (ii) the LIBOR plus the LIBOR rate margin. We were in compliance with all loan covenants as of the end of the third quarter of 2015. As of September 27, 2015 , the Company had $1.0 million of revolving debt outstanding with an interest rate of 3.13% .

Most of our cash and cash equivalents were invested in money market funds with investment bankers rated AAAm/Aaa. Our interest-bearing debt consisted of $349,000 outstanding under capital leases and $1.0 million outstanding under our revolving debt (see Note 5 of the Condensed Unaudited Consolidated Financial Statements).

Cash balances held at our foreign subsidiaries were approximately $1.2 million and $868,000 at September 27, 2015 and December 28, 2014 , respectively. Earnings from our foreign subsidiaries are currently deemed to be indefinitely reinvested. We do not expect such reinvestment to affect our liquidity and capital resources, and we continually evaluate our liquidity needs and ability to meet global cash requirements as a part of our overall capital deployment strategy. Factors which affect our global capital deployment strategy include anticipated cash flows, the ability to repatriate cash in a tax efficient manner, funding requirements for operations and investment activities, acquisitions and divestitures and capital market conditions.      

In summary, our cash flows were as follows (in thousands):


28

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

 
Nine Months Ended
 
September 27,
2015
 
September 28,
2014
Net cash (used in) operating activities
$
(6,508
)
 
$
(9,790
)
Net cash (used in) investing activities
(237
)
 
(523
)
Net cash provided by financing activities
136

 
4,066


Net cash from operating activities
 
Net cash used in operating activities was $6.5 million in the first nine months of 2015 . The cash used for operating activities was a result of the net loss of $13.0 million , partially offset by cash provided by changes in operating assets and liabilities of $3.9 million , and $2.6 million of net non-cash charges. Non-cash charges consisted primarily of stock-based compensation of $1.5 million , depreciation and amortization of $1.1 million , a write-down of inventory of $14,000 and assets write-off of $8,000 . The cash from changes in operating assets and liabilities was mostly due to a decrease in inventories of $2.6 million as a result of sales of existing new product inventory, increase in accrued liabilities and deferred revenue of $547,000 , a decrease in other assets of $421,000 , and an increase in trade payables of $397,000 due to the timing of payments. 

 Net cash used in operating activities was $9.8 million in the first nine months of 2014. The cash used in operating activities was the result of the net loss of $8.9 million and cash used for operating assets and liabilities of $3.8 million partially offset by $3.0 million of net non-cash charges. These non-cash charges consisted primarily of stock-based compensation of $1.8 million, depreciation and amortization of $1.1 million, and a write-down of inventory of $96,000. The cash used for operating assets and liabilities was mostly due to an increase in inventories in anticipation of potential future revenues and a reduction in accounts payable due to timing of payments.

Net cash from investing activities
     
Net cash used for investing activities in the first nine months of 2015 was $237,000 , which was primarily from cash used to acquire equipment and software used for the production and development of new products. Capital expenditures, which are largely driven by the development of new products and manufacturing levels, are projected to be approximately $45,000 during the remainder of fiscal year 2015 .

Net cash used for investing activities in the first nine months of 2014 was $523,000 , which was primarily from cash used to acquire equipment and software used for the production and development of new products.

Net cash from financing activities
 
Net cash provided by financing activities was $136,000 in the first nine months of 2015 , primarily derived from proceeds related to the issuance of common shares to employees under our equity plans of $394,000 , partially offset by scheduled repayments of lease obligations of $258,000 .
 
Net cash provided by financing activities was $4.1 million for the first nine months of 2014, primarily derived from proceeds related to the issuance of common shares to employees under our equity plans of $4.3 million , partially offset by scheduled repayments of lease obligations of $268,000 .

We require substantial cash to fund our business and currently use cash to fund capital expenditures and operating losses. Based on past performance and current expectations, we believe that our existing cash and cash equivalents, together with available financial resources from the revolving line of credit facility, will be sufficient to fund our operations and capital expenditures, and provide adequate working capital for the next twelve months.

After the next twelve months, our cash requirements will depend on many factors including our level of revenue and gross profit, the market acceptance of our existing and new products, the levels at which we maintain inventories and accounts receivable, costs of securing access to adequate manufacturing capacity, new product development efforts, capital expenditures and the level of our operating expenses. In order to satisfy our longer term liquidity requirements, we may be required to raise additional equity or debt financing at commercially acceptable terms.
 

29

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

Contractual Obligations and Commercial Commitments
 
The following table summarizes our contractual obligations and commercial commitments as of September 27, 2015 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands):
 
 
Payments Due by Period
 
Total
 
Less than
1 Year
 
1-3 Years
 
More than
3 Years
Contractual obligations:
 

 
 

 
 

 
 

Operating leases
$
2,174

 
$
746

 
$
1,268

 
$
160

Wafer purchases (1)
3,203

 
3,203

 

 

Other purchase commitments
1,835

 
1,550

 
285

 

Total contractual cash obligations
7,212

 
5,499

 
1,553

 
160

Other commercial commitments (2) :
 

 
 

 
 

 
 

Revolving line of credit
1,000

 

 
1,000

 

Capital lease obligations (3)
349

 
229

 
120

 

Total commercial commitments
1,349

 
229

 
1,120

 

Total contractual obligations and commercial commitments (4)
$
8,561

 
$
5,728

 
$
2,673

 
$
160

_________________
 
(1)  
Certain of our wafer manufacturers require us to forecast wafer starts several months in advance. We are committed to take delivery of and pay for a portion of forecasted wafer volume. Wafer and finished goods purchase commitments of $3.2 million include firm purchase commitments as of September 27, 2015
(2)  
Other commercial commitments are included as liabilities on our balance sheet as of September 27, 2015 .
(3)  
For a detailed explanation, see Note 5 of the Condensed Unaudited Consolidated Financial Statements. 
(4)  
Does not include unrecognized tax benefits of $36,000 as of September 27, 2015 . See Note 10 of the Condensed Unaudited Consolidated Financial Statements.
 
Concentration of Suppliers
 
We depend on a limited number of contract manufacturers, subcontractors, and suppliers for wafer fabrication, assembly, programming and testing of our devices, and for the supply of programming equipment. These services are typically provided by one supplier for each of our devices. We generally purchase these single or limited source services through standard purchase orders. Because we rely on independent subcontractors to perform these services, we cannot directly control product delivery schedules, costs or quality levels. Our future success also depends on the financial viability of our independent subcontractors. These subcontract manufacturers produce products for other companies and we must place orders up to several months in advance of expected delivery. As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have an excess or a shortage of inventories of a particular product, and our ability to respond to changes in demand is limited by the ability of our suppliers to provide products with the quantity, quality, cost and timeliness that we require. The decision not to provide these services to us or the inability to supply these services to us, such as in the case of a natural or financial disaster, would have a significant impact on our business. Increased demand from other companies could result in these subcontract manufacturers allocating available capacity to customers that are larger or have long-term supply contracts in place and we may be unable to obtain adequate foundry and other capacity at acceptable prices, or we may experience delays or interruption in supply. Additionally, volatility of economic, market, social and political conditions in countries where these suppliers operate may be unpredictable and could result in a reduction in product revenue or increase our cost of revenue and could adversely affect our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

 We do not maintain any off-balance sheet partnerships, arrangements or other relationships with unconsolidated entities or others, often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.


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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

Recently Issued Accounting Pronouncements
 
See Note 2 of the Condensed Unaudited Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and expected effects on results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Interest Rate Risk
 
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio and variable rate debt. We do not use derivative financial instruments to manage our interest rate risk. We are adverse to principal loss and ensure the safety and preservation of invested funds by limiting default, market risk and reinvestment risk. Our investment portfolio is generally comprised of investments that meet high credit quality standards and have active secondary and resale markets. Since these securities are subject to interest rate risk, they could decline in value if interest rates fluctuate or if the liquidity of the investment portfolio were to change. Due to the short duration and conservative nature of our investment portfolio, we do not anticipate any material loss with respect to our investment portfolio. A 10% move in interest rates as of the end of the third quarter of 2015 would have had an immaterial effect on our financial position, results of operations and cash flows.
 
Foreign Currency Exchange Rate Risk
 
All of our sales and costs of manufacturing are transacted in U.S. dollars. We conduct a portion of our research and development activities in Canada and India and have sales and marketing offices in several locations outside of the United States. We use the U.S. dollar as our functional currency. Most of the costs incurred at these international locations are in local currency. If these local currencies strengthen against the U.S. dollar, our payroll and other local expenses will be higher than we currently anticipate. Since our sales are transacted in U.S. dollars, this negative impact on expenses would not be offset by any positive effect on revenue. Operating expenses denominated in foreign currencies were approximately 16% and 19% of total operating expenses for the first nine months of 2015 and 2014 , respectively. A currency exchange rate fluctuation of 10% would have caused our operating expenses to change by approximately $313,000 in the first nine months of 2015 .
 


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Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Based on management's evaluation as of September 27, 2015 , our Chief Executive Officer and Principal Accounting Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Principal Accounting Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Part II. Other Information

Item 1. Legal Proceedings
 
See Note 13 and 14 of the Condensed Unaudited Consolidated Financial Statements for a description of legal proceedings.
 
Item 1A. Risk Factors
 
Our 2014 Annual Report on Form 10-K for the year ended December 28, 2014 , filed with the SEC on March 5, 2015 , includes a detailed discussion of our risk factors at Part I, Item 1A, Risk Factors, which discussion is hereby incorporated by reference into this Part II, Item 1A. Any information presented below updates and supplements, and should be read in conjunction with, the risk factors and information disclosed in that Form 10-K and in conjunction with any subsequent updates disclosed in our quarterly filings on Form 10-Q.

The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial may also adversely affect our business and results from operations.

Item 4. Mine Safety Disclosures

Not applicable.


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Item 6. Exhibits
 
a.      Exhibits
 
The following Exhibits are filed or incorporated by reference into this report:
 
Exhibit
Number
 
Description
31.1